I was just looking through a fascinating collection of data relating to the mortgage disaster put together by the Milken Institute. At the peak of subprime mortgage lending in 2006, there were about $1.2 trillion of outstanding subprime mortgages. By March of this year that had dropped to just under $900 billion. To date, financial institutions around the world have recorded losses (most of them related to subprime lending) of just over $500 billion.
The eventual losses suffered by holders of defaulted mortgages will be equal to the original value of the mortgages less the recovery value of the homes that are sold in foreclosure. Let's be very pessimistic and assume that every single subprime mortgage ever made was a zero down loan; that they all default; and that the foreclosed homes all sell for only 50% of their original value. That would translate into total subprime losses of roughly $600 billion.
That's most likely the upper limit for subprime losses. Derivatives and leverage can't magnify these losses. Derivatives only distribute losses. Leverage magnifies the losses of the leveraged loser, but leverage doesn't increase the total losses to the system.
So, it would appear that we are closing in on the tail end of the subprime-related losses. The vast bulk of the losses have been taken, realized, and written down. There's not much left to this sad and tragic story. But it sure seems like a pretty small tail to be wagging the big global dog.